Lease to Own - 7 yrs

[Kenneth Wong]

Hello fellow BP community.

Sorry this is long, but I need some feedback.

This involves a single family 3Br, 1Ba Connecticut Colonial short sale (4 lots; total .66 acres).  

It reflects committing the cardinal sin of creating a ho-hum house to one of the biggest and most expensive houses in a fifteen square block radius of a lower middle class neighborhood.  The house was built by a former architect and is rock solid with character. Due to the total costs, the house cannot be sold conventionally, as the neighboring home comps are $90K to $141K in the immediate area.  

Numbers are as follows, house reno details at the very bottom:

1. Purchase Details

Purchase Cost (includes legal fees and oil):  $70K  (short sale; no liens)

Repairs and appliances:                               $135K

Total out of pocket costs:                             $205K

Original house = 1836 square feet; (4) building lots; 3BR, 1bath; hardwood floors; 1 lot

2. Offer of lease to own post renovation, for renovated (3100 sq ft) single family with basement area plus (3) building lots on corner lot; monthly payments for 7 years: 

Year 1: $2100 x 12 = $25,200

Year 2: $2200 x 12 = $26,400

Year 3: $2300 x 12 = $27,600

Year 4: $2400 x 12 = $28,800

Year 5: $2400 x 12 = $28.800

Year 6: $2400 x 12 = $28,800

Year 7: $2400 x 12 = $28,800

TOTAL:                     $194,400  (7 year projected monthly payment total)

After 84 payments; refinance balance due: $164,000; potential sale: $358,000

Lease to own family pays the above; their plan is to save $10k per year to give an additional $70k at 84th payment to lower the refinance of the house from $164K to $94K. 

3. During the course of the 7 years, a caretaker will live in the basement and will maintain the property and perform other duties in exchange for a reduced monthly charge.  contract expires at transfer of deed. Total 7 year projected net income from caretaker: $50,400

4. Providing the above is current, the landlord pays for all utilities, real estate taxes, snow removal, lawn care; projected 7 year costs as follows:

Electric                  $21K

Gas                        $16K

Water                     $  6K

Real Estate taxes   $35K

Snow removal        $ 1K

Lawn care              $ 1K

Projected Utility Cost: $80K  (7 years)

NOTE: 7 year totals: 

Projected Income: +$194,400 (lease to own family)

                               +$ 50,400 (caretaker)

Refi:                       +$  94,000 (conventional bank or landlord)

Addt'l Payment:     +$  70,000

7 Year Total:            $408,400

5. Financial Details for 7 Yrs

House purchase + renovations:                        -$205,000

Projected landlord costs:                           -$ 80,000

Projected collected income for lease to own:  +$408,400

Net potential Gain:                                            +103,000

SO,

although this is a long way to sell an expensive house in a not so perfect area, bucking the location, location, location rule, the new homeowner will control 3 building lots, plus the extraordinary basement apartment, after 7 years of payments plus refinance.  They could rent the basement out for $1200+ per month, which would allow rent free living by the owner.

Any thoughts on this?  Legality on lease-to-own format? Gotchas?

Many thanks.

House renovation Details:

Gutted the entire house

New kitchen; high end stainless steel appliances (Viking, Samsung, Bosch); tiled floors; cabinets;                island with Viking gas range and island  exhast hood

Basement apartment (540 sq ft); IKEA kitchen; high end appliances and huge tile walk in                            bathroom/changing room

Full attic renovation to a 40 x 20 room; sound proofing; insulated; private staircase

New half bath on first floor

New door to rear deck back porch

New deck/porch; two tone trek on pressure treated lumber

New Italian tile laundry room

New Gas Furnace ((Peerless 100K btu)

New tankless water heater; using existing electric water tank as emergency

New roof on garage

[Kenneth Wong]

Hi Jim,

Just to be clear, this property is overpriced due to the quality of the renovations, and as stated, I could not sell it by location, location, location standards- so I sold it for the quality of my work and more importantly, it's cash flow.  The premise behind the 7 year lease to own terms is that there are three total building lots that are associated with the property.  The cash flow generated after 7 yrs, through income and tax benefits, should allow the new owner to buy a pre-fab 3 BR, 1.5 bath for roughly $75K, on one of the lots.  Rental income could generate an additional $18K per annum. Three more years later, you could repeat the scenario, and build another pre-fab.  You can see with three units of rental income, that is the cash flow I estimate at $48K within 13 years.

I absolutely agree with you that there are not many $358K homes in Waterbury.  But, I think that I mentioned there are a variety from $75K - $180k in the immediate area.

The family living there now came from the projects, and sought a better quality of life.  

Lastly, yes, I have built into the equation a caretaker, who lives on premises.  The caretaker maintains the house in every capacity.  After a rocky first 2 weeks, all seems to be fine.

Keeping my fingers crossed.....